Changing colour of money lending
With the Centre and states trying to regulate the microfinance industry,theres a question mark on the future of the.30,000-crore sector,say Trushna Udgirkar & R Sriram
With the Centre and states trying to regulate the microfinance industry,theres a question mark on the future of the.30,000-crore sector,say Trushna Udgirkar & R Sriram
JUSTICE P Dinakaran is today known for not making it to the Supreme Court for his alleged involvement in land deals.What is little known,however,is that Mr Dinakaran,when he was a judge in the Madras High Court,was the author of a judgement that is today threatening the fledgling microfinance industry in southern India.
In Bhagavathy versus State of Tamil Nadu suit,Mr Dinakaran upheld a government bill that sought to punish defaulting financial service companies by seizing and selling their assets and returning money to depositors.The petitioner contended that the state can have no power over finance firms.They are regulated and controlled by the Reserve Bank of India (RBI).The court dismissed that view.
What does it have to do with Vikram Akula-popularised microfinance The answer,quite a lot.Microfinance is now a subset of the financial services industry.Many are finance companies registered with RBI and supposedly governed it.Like normal finance firms in Tamil Nadu,they are facing the full glare of public spotlight and governmental anger in Andhra Pradesh.
The Andhra Pradesh High Court declined to stay the government law regulating MFIs that mandates registration with local authorities,curbs rates,recovery and lending practices,and stiff penalties for violation and non-compliance.A lesser version is being planned by the central government in the micro finance bill.
MFIs said the state is not competent,hence law should be declared null and void. But the court refused.
We cannot give a blanket ban against the ordinance, chief justice of the AP High Court,Nisar Ahmed Kakuru declared.
MFIs should comply with the law,but can continue with their business.
The crux of the issue is not about finer points of law.The future of the.30,000-crore MFI industry is at stake and any precipitate move will clip the wings of the fledgling industry.
In Hyderabad last week,the mood among MFIs was one of despondency,from euphoric a few weeks ago when SKS Microfinance,the biggest among them,began trading at a high premium to initial public offering price.
This was the end,some feared.A switched-off cellphone was enough to spark rumours.Padmaja Reddy,managing director of Spandana Sphoorty,the secondbiggest MFI after SKS,woke up from a tired sleep on Friday to dispel rumours that she has been arrested.I hadnt slept for the past few days, a bemused Ms Reddy says.I switched off my phone at about 4:00 am to sleep for some time.
Yet,in the midst of all this,some MFI CEOs were asking questions.How did things come to such a pass How did a carefully cultivated reputation and public trust get eroded so quickly Is it greed Politicians fishing in troubled waters There are no easy answers.
We blame others.But many of the problems are within us, one MFI CEO said.Highly-paid CEOs flaunting wealth,companies eager to advertise growth to attract private funds and it all adds up to the perception of an industry no longer working for the poor,but make money out of misery.
Microfinance has evolved as a bustling business drawing sophisticated investors from Sequoia Capital to Infosys Technologies founder NR Narayana Murthy.Jet-setting executives have replaced images of villagers working for community;plush corporate offices replaced spartan brick homes and images of swarthy villagers speaking in earthy,rustic dialect gave way to Americanised accents.
We think they are money lenders and we want to regulate their money lending operations, says R Subrahmanyam,principal secretary,Panchayat Raj and rural development,Andhra Pradesh.Microfinance has changed from community initiatives where the surplus stays within the group to a corporate enterprise,he says.
Akula,the founder of SKS who was once on course to be Indias Mohammed Yunus,is a fallen angel.The controversial sacking of his chief executive S Gurumani has worsened the image.
To be fair to microfinanciers,many of the charges are probably exaggerated.Change was forced upon the industry.A private society-led approach would be unsustainable as liabilities are unlimited and outside talent will not work under such rules;private equity money was needed to grow.Public markets,at least till the SKS IPO,were unfriendly.Salaries were paid to draw the best talent.The mistake microfinance made was to allow perception they are into social service and not business.
Nobody can argue against giving loans to an ordinary plumber or electrician.Forty one years of bank nationalisation and thousands of crores of investment in rural banking have failed to promote financial inclusion.Microfinance is just plugging that gap.
We failed to position ourselves.We should be true to what we are, says Ms Reddy.The question now is whether it is too late.Mr Subrahmanyam believes that the state government can regulate interest rates.If that happens,it will sound the industrys death-knell.
Even the central bank is singing the same tune.Governor D Subbarao,wrote,I would,however,like to mention that the state government may be the most effective agency in controlling irregularities in regard to coercive interest rates.The state government has a critical role in increasing the financial literacy and awareness of small borrowers,who are the usual victims of such malpractices. ET has a copy of the July 19 letter.Some CEOs support this view.Interest rate cap will sanitise the sector, says Ms Reddy.
But some believe the government is over-stretching and may kill what it wants to achieve,financial inclusion.I fear that the changes by the government will kill the industry, says Krishnamurthy Subramanian,assistant professor,finance,Indian School of Business.A balanced approach will work.Otherwise,they may throw the baby out with the bathwater.
The controversy has already taken its toll.Private equity,venture capital interest in microfinance has shrunk.
We were besieged by calls some weeks ago.The last four days,there has been complete silence, says the CEO of a microfinance firm quoted earlier.trushna.udgirkar @timesgroup.com